Whenever a business entity, like a limited company, incorporates with Companies House, it must pay corporation tax on its profits to HMRC in an accounting period. Hence, if you are a business owner and actively looking for ways to learn how to reduce the corporation tax bill for a limited company, you have landed on the right page.
That is, whenever a limited company in the UK produces taxable income, it becomes mandatory to register with HMRC to pay corporation tax. Thereafter, filing company tax returns on an annual basis is also crucial.
How much corporation tax you will pay depends upon the amount of profit your limited company makes through its trade or business.
Furthermore, limited companies in the UK usually pay between 19% and 25% Corporation Tax based on their profits.
With the new tax regulations of the UK government, the increase in the Corporation Tax rate to 25% for profits above £250,000 has compounded the tax burden on many businesses.
In this guide, we will comprehensively discuss the most effective ways to help you understand how to reduce the corporation tax bill for a limited company.
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How to reduce corporation tax bill for a limited company?
The following are the prime considerations when you are determining how to reduce the corporation tax bill for a limited company:
Claim every allowable business expense:
First and foremost, the key to reducing the corporation tax bill is to reduce the profit since the more profit your limited company generates, the more corporation tax it will be liable to pay. To achieve this, you must claim all the allowable expenses when running a limited company irrespective of how small or big that expense might be.
For greater clarity, you can viably deduct all the costs (from the profits) on expenses that you solely and specifically spent for business purposes.
Now, what comes under the business-related expenses?
Fortunately, there is a wide range of claimable things, including office supplies costs (stationary, tools, equipment, raw materials), bank loan interest, staff salaries, utility bills, advertising costs, childcare, business trips costs (including travel and accommodation), accounting and legal fees, and the like.
More crucially, the taxation and reporting rules are different based on what type of expense you are claiming. So, you must have full clarity regarding all the allowable expenses. Therefore, it is advised to view a full list of expenses and benefits alongside the applicable tax rules and rates on the GOV.UK website as an A-Z list.
Notably, you must maintain a record of your claimable expenses. While it is a good practice, it is also vital. HMRC can refuse to accept your claim if you do not have an accurate record.
In summary, you can reduce your profits by claiming all allowable business expenses and deducting them from your company’s taxable profits. As a result, you reduce the corporation tax bill for a limited company.
Remember to pay yourself a salary:
A limited company operates as a distinct legal entity, separating the company’s financial and legal liabilities from the owners’ personal assets. However, if you are running it individually as a single director, it is in your favour to forget your company’s separate legal status.
Also, assume that the profits your company has generated are not yours. Instead, pay yourself a salary.
As mentioned above, an employee’s salary is a claimable business expense. Likewise, as a director, you can also pay yourself a salary and make it a business expense. With this effective strategy of paying yourself, you can reduce the corporation tax bill for a limited company by cutting down its profit.
If you want to learn how to register a limited company with Companies House and why you should create it given its benefits, read out respective guides,
How to set up a limited company?
Limited company advantages and disadvantages.
Now, you can receive your salary through Pay As You Earn (PAYE). Subsequently, the income tax and National Insurance Contributions (NICs) will be deducted from your salary.
Interestingly, the most tax-efficient salary threshold for 2024/25 is £12,570 per year or £1,047 per month because there is no personal tax payment on this figure. As an outcome, your limited company will only have to pay a meagre amount of NICs on this salary.
Moreover, if you withdraw any additional income from the business, you can withdraw it in the form of a dividend. Fortunately, dividends are also withdrawn from profit.
Nevertheless, you must have proof to display that you have adequate profits available before you issue dividends. If not, HMRC will most possibly re-categorise or re-classify your dividends as salary. As a result, you will needlessly have to pay Income Tax and National Insurance Contributions on dividends.
All in all, before it is time you pay the corporation tax for your limited company, pay yourself a salary!
Consider making employer pension contributions:
Another significant method to reduce the corporation tax bill for a limited company is to make pension contributions.
If a limited company has employed you, you can use your company account to make employer contributions to your pension. When a limited company pays employer contributions into your pension, these contributions will also fall under the category of a business expense.
Hence, it can be deducted from the taxable profits and will be excluded from corporation tax. Besides, you can save on national insurance contributions.
It is worth highlighting that your employer and employee contributions must not exceed your annual allowance, which is currently set at £60,000 when added together.
Ultimately, with contributions to a director and staff pension schemes, a limited company can fully use a director’s annual pension contributions allowance. In addition, any unused allowances from the previous three years can also be utilised.
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Submit an early payment to HMRC:
Surprisingly, fortune favours the early submitters when it comes to corporation tax. That is, if you pay your tax bill ahead of or earlier than when it is due, HMRC will return you a portion of it as interest at a rate of 0.5%.
Beyond that, HMRC will usually pay interest from the date you pay your corporation tax until the payment deadline. Notably, the earliest it will pay you interest is six months and 13 days following the start of your accounting period.
Ultimately, by remaining on top of your tax matters and paying your Corporation Tax ahead of time, you can claim some part of it as interest from HMRC.
Make charity donations:
Another key method to reduce the corporation tax bill for a limited company is by making charity contributions. If you give money to charity via your limited company, it will be deemed as an expense. Accordingly, you will deduct the charity donations from the total business profits before paying the tax.
Consequently, it will bring down your corporation tax bill.
Similarly, you can make charitable contributions through one-time donations, direct debits or sponsorships.
Remember, charity donations do not qualify as business expenses if they are loans the charity would repay or if the charity wants to buy property related to the business.
Look for the appropriate government tax relief schemes:
Fortunately, The UK government provides a number of tax relief schemes for businesses operating in certain fields:
Research and development scheme:
You can reduce the corporation tax bill for a limited company by using the R&D tax relief. You can use it if you are pursuing robust growth in your field.
R&D tax relief enables limited companies to claim ample tax breaks for their innovative projects.
For instance, companies’ projects eligible for R&D tax relief include those actively pursuing a significant improvement in science or technology.
Eligible companies can reduce taxable profits and secure tax relief on qualifying expenses. Alternatively, they can create or increase tax losses, which they can give to HMRC in return for cash repayment.
Further elaborating, a small-to-medium limited company spending £100k of qualifying costs can avail of a generous tax relief by saving an additional £21k in tax.
Likewise, large limited companies can avail of tax savings under the RDEC scheme (R&D expenditure credit), which offers a 15% repayable amount after tax for every £1 paid.
Patent Box scheme:
If your limited company diligently promotes innovation and creates new patented innovations and technologies, the UK’s government Patent Box scheme is for you.
When your limited company produces income from patented products or inventions, it can qualify for a reduced corporation tax rate of 10% on profits derived from those patents. It is less than half of the standard tax rate of 25%.
Creative Industry scheme:
Similarly, you can reduce the corporation tax bill for a limited company under Creative Industry Tax Relief (CITR). There are several industries included in this scheme, like theatres, video games, and children’s television. Thus, if a limited company operates in these specific fields, it can increase its allowable expenses with CITR.
Claim capital allowances:
When a limited company purchases assets that it will use for business, it can claim capital allowances. These assets particularly include plants, machines, vehicles, and equipment for business purposes.
After calculating the value of the items or assets, it can be deducted from the profit.
Moreover, you can also claim capital allowance on the following:
- Renovation of business buildings in underprivileged areas of the UK
- Extraction of minerals and dredging
- R&D projects.
- Construction (structures and buildings) costs
Claim employment allowance:
Under the employment allowance scheme, certain limited companies can reduce their annual National Insurance contributions (NICs) by as much as £5,000 in the tax year. Notably, it will increase to £10,500, effective from April 2025.
Furthermore, this scheme is presently offered to employers with Class 1 National Insurance liabilities of less than £100,000 in the last tax year. Luckily, this restriction will expire in April 2025.
It is worth pointing out that employment allowance cannot be claimed by single directors when there are no other employees in the company responsible for employers’ NIC.
Conclusion:
In a nutshell, you can reduce the corporation tax bill for a limited company by ensuring your business expenses are recorded properly and which of the above strategies are most appropriate and tax-efficient for you to employ.
Moreover, with the help of a skilled accountant, optimising the corporation tax will be far easier and more convenient. An accountant can give you a personalised consultancy consistent with your business needs. Hence, visit Accountingfirms today to find the best accountant by comparing prices based on your specific location.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.